Large originators and servicers have long relied on the efficiencies and cost savings of outsourcing, some going as far as building their own offshore facilities, known as “captives” among business process outsourcers. But now, outsource vendors are offering custom fulfillment services, combined with loan origination technology, to small and midsize lenders.
While these technology and outsourcing vendors would like to see their business grow by adding a multitude of small lender clients, it’s not quite a booming trend.
According to the 2009 survey conducted by Mortech LLC, 99% of mortgage lenders with $100 million or less in annual origination volume don’t use outsourcers.
“Large lenders often outsource to reduce costs, to supplement capacity and to access specialized skills,” said Jeff Lebowitz, Mortech’s president. “Small lenders rarely contract out basic business functions to third-party contractors.”
By providing both the loan origination system and the outsourcing, workers at both the outsourcer and lenders have access to the same Web-based systems and workflow.
“Strategically, you are working with one vendor who has skin in the game and a deep knowledge of the process and the technology,” said Anil Raibagi, CEO of Wipro Gallagher Solutions, in Franklin, Tenn. “That helps you focus on your core business, which is originating loans and allowing your partner to deal with the back office.”
Mortgage outsourcers like WGS and ISGN, another global firm with mortgage operations based in Bensalem, Pa., typically pick up the process after a local loan officer has taken the application from a borrower.
The outsourcer can conduct any combination of underwriting and settlement services tasks, as well as closing and post-closing delivery. Some lenders chose to handle certain steps in the process and outsource others. Since both sides are using the same technology and workflow, the partnership is more integrated.
Smaller lenders use outsourcing differently than large lenders, said Chetan Patel, ISGN executive vice president.
Small banks with volatile origination volume—anywhere from single digits to a few dozen loans a week—don’t want the overhead associated with full-time staff for underwriting, so they outsource it. They can pay either per closed loan or in stage-based pricing, where incremental steps in the process are paid piecemeal.
“The fallout ratio in this space is pretty high,” Patel said. “If they want to pay per closed loan, the price is a little bit higher, but if they want to pay per registered loan, then the price gets cheaper.”
By outsourcing the back-office operations, Patel said small lenders can realize cost savings up to 30%.
And there are some small and midsize lenders who are the early adopters realizing those benefits, like the mortgage division of South Central Bancshares of Kentucky, which last year became one of the first small lenders to use the outsourcing services of technology and outsourcing vendor ISGN. The billion-dollar holding company owns five chartered banks and a mortgage division, all under the South Central Bank banner.
The mortgage division’s president, Tom Hughes, said despite the sizable balance sheet and 26 branches across rural Kentucky, South Central Bank is a community lender that puts a premium on customer service and retention. After years of “drowning under the volume” of origination booms, he was turned on to ISGN’s fulfillment services during a webinar. Soon, he was working with ISGN to devise a workflow for his staff underwriters and ISGN’s outsourcing center.
“What happens in a community-banking environment, we can’t bring in people and lay off people, which I don’t like to do,” Hughes said. “The fulfillment center helps me have all the processors I need to expand and grow and also help out during peak production times that we experience in the mortgage business.”
Like many lenders, the past few years have been a roller coaster of volume peaks and valleys. “The majority of the people out there have refinanced, but there are still several who haven’t,” Hughes said. “I’m expecting another small boom because the 15-year rate is below 4% right now and we’ve got people coming in.
“Our fame is customer retention and they allow me to get loans processed in a timely manner,” he said.
“The fulfillment center allows us to have the extra staff on hand on an as-needed basis,” Hughes added. “It allows us to handle twice as much volume as we normally would without them.”
The bank started outsourcing 25% of its volume, which has grown to 75%. Attrition has reduced the number of staff underwriters, while others are transitioning to higher-skilled closing agent jobs.
“The labor pool in our area does not give me enough qualified people in rural Kentucky that might be in a more urban center or have more experience,” he said.
The bank is a direct Freddie Mac seller and retains servicing rights on its loans. In September, the relationship with ISGN enabled South Central Bank to add a new wholesale channel that’s processing and closing mortgages, as well as selling to Freddie, for 10 small area banks.
The mortgage division’s underwriting manager runs what Hughes called a “triage desk,” for the loans that come in from South Central’s retail, online and wholesale channels. The manager either assigns the loan to a staff underwriter or to the ISGN fulfillment center. ISGN takes the loan through the underwriting process up to closing, when it is sent back to the mortgage division for completion.
Hughes sees outsourcing as a way for his operation to gain a competitive advantage, and said it helps that it hasn’t yet caught on in with other small lenders.
“Not in the community banks,” he said, when asked if competitors are outsourcing. “I’m on Freddie Mac’s advisory board for community lenders and I just got back from a meeting. I’m kind of out there on this as far as community banks go.
“Most community banks have never even heard of fulfillment and they’re not using it that much,” he added.
ISGN offers two different LOS platforms, one for small lenders and another for larger clients. Both technologies integrate with ISGN’s outsourcing services. The company is in the process of bringing a new platform to market that combines the strengths of both platforms into a single browser-based LOS for both segments of the market, called Catapult.
As ISGN continues its launch of Catapult, it will look to persuade lenders like South Central Bank—which uses ISGN’s outsourcing, but with Avista Solutions’ Avista Agile LOS—to make the switch.
“The reason we use Avista is because it’s got all three things in one,” Hughes said. “We can do consumer online, retail through our own lenders and the mini-wholesale. It also enables us to get in the ISGN fulfillment center.
“I’m very high on that fulfillment center. We could not do what we’re doing without them,” he said, adding, “Right now, there’s no reason to change” the LOS.
That’s not to say that his bank is content with existing technology, either.
“We’re going to have to adopt a new generation of technology in order to survive,” Hughes said. “We’re going to have to be ready for consumer online applications as we get a more technology savvy group of borrowers out there who will be expecting service online.”
On top of the cost savings, lenders benefit from ISGN’s guarantee on its underwriting services. “With an outsourcing arrangement, if we make a mistake, there is recourse available because we provide a guarantee,” Patel said.
That assurance is of even greater importance as lenders face new regulations.
“The big thing impacting our business is we’re getting a regulation to regulate the regulations. It’s unbelievable what’s coming through there,” Hughes said.
“The community banks have the best performing loans of anybody’s book, but we’re paying the price for some of the issues that were done by the bigger mortgage companies back in the days of loose underwriting,” he added. “Our underwriting has always been a little tighter and the performance of our loans is better.”
Outsourcing fulfillment doesn’t mean underwriting is shifting overseas. ISGN has centers in Connecticut, Florida, Texas, Michigan, Georgia and Pennsylvania.
Wipro also sees benefit in having domestic outsourcing, particularly in the mortgage industry and has a center in Tennessee that handles mortgage work.
“I still talk to people today where the minute you say outsourcing they picture some back office overseas location,” Cleaver said. “You’re seeing an evolution and an education and a maturity of not only the outsourcing from a vendor perspective, but also from the lender side of the house.”
Lenders don’t want to appear as if they’re outsourcing work overseas during a time of high unemployment, Cleaver said. “With everything that’s gone on the last couple of years, everybody’s sensitive about everything.”
South Central Bank already sent loans from the branches to a central hub, so outsourcing in Florida was of no concern.
“Location doesn’t matter with the technology we have today,” Hughes said. “That back-office function can be handled wherever. It’s just a back office and who really knows where a back office is?”
